It seems intuitive that a majority of democratic citizens would want higher taxes on the rich — after all, most voters aren't rich themselves. You find that it's more complicated. Why?
A person’s wealth only partly explains what they think about progressive taxation. We know from our survey work (here and here) that many low- and middle-income people aren’t eager to see heavy taxes on the rich. The explanation for this has to do with different standards of fairness. Fairness can mean applying an “ability to pay” standard where those with more should pay higher rates because they can better afford to. But fairness can also mean adhering to an “equal treatment” standard, under which, just as everyone in a democracy has one vote, they ought to also all pay the same tax rate. In our book, we show that the debate between ability to pay and equal treatment standards for fairness has been around for 500 years. Once we accept that there are multiple standards for tax fairness, we can better understand why democracies often don’t tax the rich heavily. We can also do so without assuming that middle-class voters who oppose progressive taxation are ignorant or that they mistakenly think they themselves will be rich one day.
Nonetheless, you find that there are historical conditions when democracies have imposed substantial taxes on the rich. What were they?
Yes, this happens when people feel like the rich are getting a free ride in some other way. If government policy favors the rich or disadvantages the poor in one realm, then even a person who believes in equal treatment may agree that the rich ought to be taxed more heavily to compensate. These compensatory fairness considerations can create a broad consensus favoring highly progressive taxes.
Over the past two centuries, the main source of consensus on taxing the rich has been war mobilization and conscription. If labor was being conscripted to fight, then those with capital should be conscripted with higher taxes. For this reason, the two World Wars ushered in an era of unprecedented tax progressivity, with higher income taxes, inheritance taxes and sometimes one-off levies on top wealth holders. The wartime environment is what got us the top marginal income tax rates in excess of 90 percent that people will often refer to today. But the effect of war mobilization was not permanent. After war’s end, the compensatory argument for taxing the rich eventually lost its resonance and new groups pushed for a less progressive tax system.
In a world where mass armies don’t play the same role they used to, can politicians make persuasive arguments for higher taxes on the rich, and what would they be?
There are at least two ways this might happen today.
The first is to emphasize some of the curious features of our current tax code. There are many cases where top earners today are receiving what ordinary people would think of as income but can be reclassified to allow them to pay lower taxes, including for example, capital gains. This feels like someone is getting a free ride even if the unfairness is not as dramatic as in the wartime example. We think an argument of this sort could be politically powerful. Maybe it’s one reason even Donald Trump as a candidate supported abolishing the “carried interest” loophole in the tax code, though of course he didn’t follow through with it.
The second way for taxes on the rich to rise would be for some progressive politician to emphasize some other, broader way in which the wealthy have gotten a free ride. Doing so would provide a powerful new justification for the taxes they are proposing. But what would this argument look like? One thing for sure is that it could not just emphasize how the rich have gotten richer. That’s something that will appeal only to those who already believe in the “ability to pay” fairness standard. What is needed is something that also convinces those who favor an equal treatment standard for fairness. This would probably need to be an argument that says not only that the rich have gotten richer, but that they have done so by free-riding on others — say, for example, as a consequence of the financial crisis and related bailouts.
When you consider the arguments of politicians such as Rep. Alexandria Ocasio-Cortez and Sen. Elizabeth Warren for higher taxes on the rich, are they likely to activate the appropriate intuitions about fairness, or alternatively are they more likely (under your arguments) to be unpersuasive?
The big question about Ocasio-Cortez’s and Warren’s proposals is whether they mainly resonates with those who are already converts to the cause of taxing the rich. So far, there have been some polls suggesting strong support for both their proposals. But we think it’s probably too early to conclude that public views on progressive taxation have really shifted this dramatically. To truly convince a broad swath of the public, supporters of the Ocasio-Cortez and Warren proposals will need to appeal to the logic of equal treatment. Recently, Gabriel Zucman, one of the architects of Warren’s 2 percent annual wealth tax proposal, has done just this. Those in the United States with large fortunes today often pay lower effective tax rates than ordinary taxpayers. Zucman argues one reason for this is that taxes on increases in asset values are only paid when the asset is sold, and even then, they are taxed at lower rates than ordinary income from earnings. Zucman could have also added a simpler equal treatment argument. Many Americans hold their wealth primarily in their house, which is sometimes taxed at an annual effective rate approaching 2 percent. Why should a wealthy person who holds many types of assets pay a lower rate than this? It is arguments like these, appealing to the logic of equal treatment, that will determine whether the Warren wealth tax proposal receives broad support.